The Week Ahead

Volume 114 - Good News = Good News ?

Someone with half your IQ is making 10x as much as you because they aren’t smart enough to doubt themselves.

Good morning or afternoon, wherever you might be.

A solid week last week bar index trades; equity positions performed well, and our oil risk reversal continues to move higher (we opened for -$0.03 and now trades for $7.38).

A late-in-the-day bid for stocks after Friday’s NFP surprise. The market would’ve been most comfortable with a print right down the fairway. Post NFP 2s10s bear flattened, rate cuts were priced out (and continue to be priced out this morning) and USD traded higher. For now the market seems set on 2x 25bp cuts before year-end.

All eyes will now turn to Thursday's upcoming US CPI print. I can’t expect it to be much of a market mover, although it could comfort those backing the soft landing narrative. The current colour reflects the confidence that disinflation will continue, but a hotter-than-expected print could further unsettle the narrative of more Fed cuts this year… unlikely… Positioning seems mixed while systematic players have added length recently, HFs seem somewhat bearish and LOs have taken a step back recently.

Stocks continue to chop around in a range, particularly in tech, where sentiment has improved, but participants remain underweight. Microsoft, which has been stuck in the mud lately, is worth watching as investor sentiment around AI growth and its earnings revisions is still mixed. With key events like the AMD AI conference and Tesla's “Robotaxi unveiling” ahead, tech remains the sector to watch for the week ahead.

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Commodities

For oil, geopolitical tension escalating is still an upside risk. The situation in the Middle East is pushing prices higher, and the lack of significant global inventories only adds to the risk. Despite OPEC’s production increase on Dec 1 and Saudi Arabia abandoning its $100 crude target, I’m still holding our risk reversal, which continues to perform well. I’m watching for any further developments that might send oil even higher. I do highly doubt that Israel will be attacking Iran’s energy facilities. With an upcoming US election, it is the last thing the current US administration wants. If anything, Israel’s response will most likely be targeting the missile launchers that were used last Tuesday. The WTI target for now is 78…, but this could change.

Shifting from commodities, let's talk about the ongoing developments in China, especially as the market returns from Golden Week...

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China - Golden Week over

China continues to command attention as it goes against my small FXI short. Not too concerned at this moment as the position is small but just a heads up that China returns from Golden Week tomorrow. The government's fiscal stimulus push has created short-term ripples across Asian equities, particularly in ADRs, which have seen solid gains lately. That said, I can’t call this a structural bull market whatsoever, while the liquidity injection has driven Chinese names higher, the underlying (real) economic challenges remain. For now, this looks more like a tradeable rally than a long-term shift. I’ll watch for any changes to the fiscal policy outlook in the next few weeks that could either confirm or cool this rally.

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UK rates (ICYMI) - My two cents

Before I remind you of what I said in the Substack chat and to lifetimers last week, there are more cuts priced in the US vs the UK next year. How? Especially when the UK’s transmission is that much faster than the US.